Twenty-four hours later, it's even clearer that the hardest thing to figure out about this
U S West
deal is not who the winners and losers may be. The hardest thing to figure out is the deal itself.
I wanted to write yesterday about this bizarre and ludicrously complex deal, but I also wanted to understand it -- not just the terms but also the motivations behind and the implications of that complexity -- before I tried to dissect it. It still makes no more sense than it did yesterday. A long list of telecom insiders I spoke with could shed no more light on it; they found it impenetrable in its structure and embarrassing in its execution.
With a soap opera-like cast of characters and themes -- two CEOs, new in their jobs, saying they'll now share power; a proposed board so large it's more like a major league baseball roster than a corporate governance mechanism; the intellectual bankruptcy of not just one but
tracking stocks; a strange name change and more -- this one promises to make a rich case study for MBA students for years to come.
So while you're digesting this afternoon's interest-rate announcement of the
Federal Open Markets Committee
and maybe also waiting for
quarterly results, here are some things to think about regarding this U S West-Global Crossing "merger." (I won't even try to outline the terms of the deal here, which have been widely -- if sometimes confusingly and often incompletely -- explained elsewhere. Take a look at the story on page three of this morning's
The Wall Street Journal
for a succinct and accurate summary of the terms.)
First and overwhelmingly, why this complexity? To be sure, this deal was cooked up in large part by Global Crossing Co-Chairman Gary Winnick, a product of Michael Milken's deal-making laboratory in the '80s, and the company's newish CEO, Robert Annunziata, who was brought in from
earlier this year to drive the deal-making process at Global. Both love complicated deals.
Winnick has done a spectacular job of creating value for Global Crossing's shareholders and, not incidentally but equally commendably, for himself, growing his personal stake in the company from $15 million to $6 billion in just a couple of years. (How foolish that we think of Internet stars like Jeff Bezos and Pierre Omidyar as come-out-of-nowhere, it-could-only-happen-on-the-Web billionaires!) And Annunziata, who had previously jumped from
to Teleport (which was acquired by AT&T in January), is also a devotee of big, raunchy deals with lots of complexity.
But why? The answers I get are fairly predictable, but not very enlightening or satisfying.
The issue of the two tracking stocks, for example: The idea is supposedly that the combined company can thus protect the lush revenues expected from its Internet-related businesses from the predations of the regulators of its mundane telephone-service business. (Obviously, those regulators would love to use combined company revenues as a basis for calculating permissible returns.) And, of course, Global Crossing-U S West wants Wall Street to be able to assign a .com-like multiple to the shares of the Internet tracker, while they accept the inevitable on the telephone side: a low multiple, based on low margins and low growth.
OK. I'm skeptical that the new company will really be able to adequately protect the flush side of the house from state regulators looking at the from-poverty, telephone-rates business ... but that's the idea.
Another one: U S West, with $12 billion-plus in revenue and $1.5 billion in profits last year, supposedly tries to acquire Global Crossing, a vastly smaller company with a relatively puny 1998 revenue of $424 million and a 1998 loss of $88 million. U S West does this by acquiring 9.5% of Global Crossing and announcing the two companies will now be a merged entity and will use the name Global Crossing. Huh? What did I miss here?
Is "Global Crossing" -- an odd name, not nearly so well known as U S West -- perceived as somehow more valuable than U S West? Is it supposed to suggest something hip and 21st centuryish? Or is U S West trying to ditch its public identity as a former regional Bell operating company? For regulatory reasons? For Wall Street image reasons?
More: Global's two-month-old effort to acquire long-distance carrier
is now going to be enriched by a buck a share for Frontier holders, up to $63 from $62. Clearly, the Frontier assets are a nice part of the merged companies, but was this buck-a-share boost supposed to be a sop to Frontier holders, to keep 'em on the ranch? Is it a (very) modest side-payment to reassure Frontier holders who may be wary of this deal?
More: The Telecommunications Act of 1996 says former RBOCs, such as U S West, can't sell long-distance service within their own service areas until they've fully opened their networks to other carriers. Hard to argue that process is complete. But the opportunity to sell its existing home-turf customers long-distance service is what U S West will be getting with Global Exchange (and Frontier). What about the regulatory hurdles here? Have we repealed that law? Does someone have a friend on the
... or maybe in
? Is this the camel's-nose-under-the-tent move that the other, so-far-not-yet-renamed Global Somethingorother RBOCs have been waiting for, so they can jump into the long-distance business in their backyards, too?
Complexity breeds complexity. Deals like this, which always smell of too many (or maybe too few) investment bankers at the table, tend to produce unwieldy, unmanageable entities that are hobbled in their markets on the Street and in their relationships with all their constituencies.
I've been a big fan of Global Crossing and have thought well of U S West, too. It hurts to see them entangled in a web so messy -- and so unnecessary. We're not idiots, and we didn't need to have all this shuffling of the walnut shells to persuade us this was a worthwhile merger.
win? U S West holders, probably. Global Crossing holders, maybe. Customers of both, probably not. U.S. telecom policy and the public interest, no way.
The market continues to be confused by this deal and not very happy about it. Monday, U S West closed down 4 and Global Crossing dropped 1 1/8, and by lunchtime today, U S West was down another 3 11/16 to 54 9/16 and Global Crossing was off 1 5/16 to 58 15/16. I expect to see both wobble for a while, while investors try to figure this one out.
On the rumor horizon, there's word that
, which I am long, may step in with a richer offer for U S West. I sure hope not. This tar baby is bad enough already; I don't want to see another vital, high-growth company get caught in this mess.
Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long Qwest, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at